Personal Banking 101: Savings Accounts

One of the most basic accounts available is the savings account. These accounts are meant to allow you a place to save your money, accumulating it for the future. Savings accounts are classified as “savings deposit” accounts by the Federal Reserve in its Regulation D, Section 204.2. You have the opportunity to earn interest on the money you have in a savings account, providing you with a return that is considered very low risk. If you keep your money in a financial institution that is insured by the FDIC or NCUA, then your money will be protected from the failure of the institution – for at least $250,000.

However, it is important to realize that this safety does come with a price: Your yield is usually quite low, especially during times of low interest rates. In some cases, your interest yield will not even overcome the annual inflation rate, depending on the type of savings account you have, and what the bank is willing to pay you. Even with this return, though, having a savings account can be useful in some situations, especially if you want an emergency fund that is readily accessible and fairly liquid.

Savings Deposit Account vs. Transaction Account

One of the most important things to realize about a savings account is that its position as a “savings deposit” account means that there are more restrictions on it than what you might see on a “transaction” account like a checking account. A checking account is still considered a deposit type account, but because it is designated for transactions, the Fed allows for unlimited withdrawals from checking accounts. Not so with savings deposit accounts. Savings accounts have a limit of six withdrawals a month, as required by Regulation D. If you exceed the withdrawal amount, your financial institution can switch your account to a transaction account.

Of course, Regulation D just sets out the conditions that define a savings account. Some financial institutions might impose a withdrawal transaction limit of three or four, rather than using the Federal Reserve’s maximum. Additionally, rather than switching your account automatically to a transaction account, some banks might close your account altogether, or restrict your access to it until certain conditions are met. Make sure you understand the fine print on your savings account terms, and that you understand exactly what your bank requires.

From the bank’s standpoint, a savings deposit account is fairly attractive. Banks are not required to hold any money in your savings account in reserve (although they can if they want to). Instead, if the financial institution wants to, it can lend out all of the money in your savings account to someone else in order to earn a higher return. With a checking account, though, the institution is required to hold at least 10% of the money in your account in reserve. This is because you are expected to be taking money out of a transaction account regularly. This is not the case with a savings deposit account. This is one of the justifications that banks have for charging high fees when you exceed your withdrawal limit on a savings account. Make sure you understand the fees that could be charged, and make sure that you keep within the limit on your savings account.

Types of Savings Accounts

There are a number of options when it comes to choosing a savings account. Some of your options include the following:

Traditional Savings Account: The lowest yields available are often found in traditional accounts from brick and mortar financial institutions. Some of these accounts are starting to require minimum balances in order to avoid monthly fees, but it is still possible to find some of these accounts with no minimum balance requirement and no fees. However, the low yields mean that fewer people are interested in traditional savings accounts. Their main advantage is that in a pinch it is often quicker to access these accounts than it is to get money from some other types of accounts.

Online Savings Account: The rise of technology has resulted in a number of online options for your banking. Brick and mortar institutions might offer special deals when you use the Internet to open a special online account. However, most people think of institutions like ING Direct, Emigrant Direct, Ally and others when they think of online savings accounts. These accounts typically pay much higher rates than traditional savings accounts. These accounts typically require that you set up a link to an existing checking account. This link allows you to make deposits and withdrawals, which typically take between one and five days.

Money Market Account: If you are interested in a fairly attractive yield, you can put your money in a money market account. These are considered deposit accounts, but they also come with the ability to write a limited number of checks per month. These accounts typically require larger balances than savings accounts to avoid monthly fees and to earn the top interest rate. Additionally, it is important not to confuse a money market account with a money market fund. A money market fund is not FDIC insured.

You can also look for special savings programs at your financial institution. Many banks and credit unions offer special accounts for children, college students and other groups. These accounts might come with bonuses and incentives not associated with regular offerings. It might be worth it to consider these options if you qualify.

Deciding on a Savings Account

As with any banking product or service, it is important for you to determine your own needs before opening an account. Decide why you want the account, and what it is most likely to be used for. Any savings account should be primarily used for savings, whether you are building an emergency fund or whether you are saving for next year’s family vacation. The type of account you choose should be based on how often you think you will need to access the money, how quickly you think you might need to access it, and what kind of yield you are getting. Once you know what you need, you can begin to determine which savings account – and which financial institution – will provide you with what you need.

This clarifies something that I have run up against in recent years: limited number of transactions on savings accounts. When did that rule change? It used to be unlimited number of transactions, whether withdrawal or deposit, on savings accounts. But in recent yeears, yes, I do find banks limiting me to a maximum of 6 withdrawals in a month.

It used to be that only money market accounts had the limitations on the number of withdrawals. But now that has expanded to regular savings accounts. That is bad for consumers.

And I only in the past year or two learned that checking accounts that offer no interest (not those that do offer interest) -- which considered to be "transaction accounts" -- are not covered by FDIC insurance. That was never my understanding before -- and I have no idea of the reason why money in those accounts would not be insured by the FDIC. God forbid I should be wealthy enough to write a check for, say, $250,000 after closing a CD, in order to move it to another bank, and the original bank goes under that day and I lose that $250,000! Why would that money not be covered by the FDIC!?

I see no reason for the FDIC to care how many withdrawals I might make from a savings account. A bank might want to add such restrictions on, but it makes no sense to me that the FDIC would care one way or the other.

Seems to me the banking rules have become worse and worse for consumers for decades. Gee, before regulation of banks started to be loosened in the 1970s, savings accounts at banks all paid 5%, and at savings and loans 5.25%. And unlimited number of withdrawals allowed. (That regulation was loosened, which has only in practice meant lower rates for savers -- and within a decade we had the savings and loan fiasco to show for it!) Look what we get now for our money! When money market accounts came in, they had the transaction limitation, but they paid more than the savings. Now, the transaction limitations are being applied to regular savings accounts even at the lowest interest rates!

non-interest bearing checking accounts have the same FDIC protection, $250,000 per depositor.

where you may be confused is that certain banks have participated in the 'transaction account guarantee program' from the FDIC, which provides unlimited coverage for transaction accounts. when these banks cease to participate in the program, it doesn't make those accounts uninsured. it just means they revert to the normal FDIC protection ($250K per depositor) without the EXTRA protection.

A general exception I have found on Savings accounts is that some S&L's in California will allow for an unlimited number of in-branch/over the counter/in-person with a teller withdrawal transactions, but keeping a limit of 6 withdrawal transaction per month when done NOT in-person at a branch with a teller, like with an ACH debit, POS debit, or ATM card withdrawal.

I was also told by both my bank and my credit union that if I needed to make more withdrawals in my savings than the 6 allowed to come in to the branch and have them do the transaction and that it would not count nor would I get a fee. This I do not understand because I usually do transfers over the phone when no employee time is used but if I drive 8 miles in the example of my bank or 20 miles to my local credit union and ask an employee to do it then the transaction would not count. I hope that bank employees would give everyone this same information. For everyone reading these posts make sure you ask your instituion about this.

My understanding of Reg D is that savings accounts are treated differently in how a bank or credit union's capitalization is calculated.

Savings accounts are supposed to be stable money -- not jumping up and down like a checking account. Hence the Federal regulation that limits the number of transactions per month for an account to be treated as a savings account on the bank's or credit union's books.

Some institutions have limits that are tighter than the Federal regulation.

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